It may surprise you to learn that contemporary financial theory does not incorporate ethics. The foundation of financial ethics is moral philosophy – which can be traced back to attempts in ancient Greece to answer the question: How should we all live?
"Unlike philosophy, financial ethics is quite new – about 20 years old," says Dr Kara Tan Bhala, president and founder of the US-based Seven Pillars Institute for Global Finance and Ethics.
"It is very important, you would think, because of the pervasiveness of financial activity, which permeates the economic, social, and political spheres. When there is a lot of money, there is a temptation to act unethically, " says Bhala, who has 23 years' experience in global finance, much of it gained working on Wall Street.
Yet financial ethics is taught as part of MBA courses in just a handful of US universities, she says.
"That is interesting, because after the Enron crisis of 2001, business ethics was made mandatory in MBA courses. But after the Global Financial Crisis of 2008, which had a much more negative effect, there was no similar mandating of the teaching of financial ethics in business schools."
Bhala says that the sidelining of ethics in finance goes back to the beginnings of finance theory, which has its roots in economics.
"Economics has been positivistic from the time of Milton Friedman, who held that positive economics was, in principle, independent of any particular ethical position or normative judgements. And this objective, value-free stance comes down to this day".
She says the dominant Modern Finance Theory, made some fundamental assumptions, including that all economic agents are rational and self-interested, and that they aim only to maximise utility, and to profit as the primary goal.
"As we know, the world is not that way. People are not driven purely by economic utility. Behavioural economics, for example, shows us that fairness plays an important role in economic decision-making. But it is not taken into account in modern financial theory."
Bhala says the theory's assumptions gradually transformed into prescriptive statements: economic agents "ought" to be rational and self-interested, and to pursue the maximisation of profit.
"Now, in the United States, if you are a company and you do not maximise shareholders' profits you are breaking the law – so, the assumption has become the ethic."
As a corrective, Bhala suggests modifying financial theory by adding a statement of intent. She offers this: the purpose of finance is to help people save, manage, and raise money.
"I am not saying that an acceptance of this statement will make everyone behave ethically, but it is a first step toward improving the culture of finance."
In all systems of ethics, secular or religious, a focus on serving or helping the 'other' is always the starting point for ethical behaviour, she says. So, it comes as no surprise that, in terms of financial ethics, the new Trump administration so far has been characterised by charges of nepotism and conflict of interest, and by questionable policy decisions – including efforts to dismantle the 2010 Dodd-Frank financial reform law.
As a property developer, profit maximisation and efficiency took precedence for Trump, she says. And that was the attitude he took into the White House.
"Trump has more than 500 local and global businesses and thousands of ongoing litigations against those businesses, and a nine-figure debt to a foreign bank. Even with the best intentions, it would be very hard to make unbiased decisions under these circumstances," says Bhala.
There is a belief in the US that a successful businessperson will make a good political leader, she says. But the track record of Thaksin Shinawatra, Thailand's magnate-turned-Prime Minister, suggests otherwise. In a striking parallel to the present US president, Thaksin's divisive rule of 2001-06 was characterised by conflicts of interest, a war on drugs, hostility toward a free press, tax avoidance, and political interference, along with accusations of demagogy.
"The US President is morally bound to put the interests of the country above his own interests. If this is seen not to be the case, citizens will lose faith in the office, and if the office has no legitimacy, the political system will lose its capacities."
Dr Kara Tan Bhala spoke about 'global financial ethics in the age of Trump' at an event hosted by the Business School, in collaboration with the New Zealand Research Centre for Law and Business and the Legal Research Foundation, in June, 2017.
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